Estate planning is best described as planning the transfer of assets to multiple generations in the most tax efficient way possible. Indeed, intergenerational wealth transfer is often at the forefront of our financial planning process for clients with many parents and grandparents wanting to give gifts to their loved ones now while retaining control over how the money is invested.

A Capital Acquisitions Tax (CAT) liability (currently at a rate of 33%) will generally arise in the below 3 scenarios:

1. Gift tax: arises when an individual receives assets as a gift from another person

2. Inheritance tax: can apply when an individual receives the benefit of an inheritance

3. Discretionary trust tax

Under current legislation, gifts can be received tax free from CAT up to a certain amount. The relevant tax-free amount will depend on the group threshold applicable which is determined by the relationship between the person giving the gift or inheritance and the person receiving it. The threshold is cumulative and includes all gifts received since 5th December 1991 within the same Group threshold are combined.

The three groups are:

Small Gift Exemption

There is a small gift exemption (SGE) from CAT and this can make a considerable difference over time. The SGE is currently €3,000 of any gift given by one individual to another, per year. There is no need for the recipient to be a relative and this exemption is “per transaction”. In other words, an individual can gift and/or receive up to €3,000 per annum to and/or from any or many individuals per year. In summary the SGE allows a client to transfer wealth easily and incrementally. Importantly these gifts are not included when ascertaining whether the tax-free threshold has been reached either, meaning the tax liability of the remaining estate on inheritance is unaffected by these exempt gifts.

Using a Bare Trust

Bare Trusts can benefit clients in their inheritance and estate planning by allowing them to invest cleverly for loved ones today by enabling beneficiaries to avail of current Capital Acquisition Tax (CAT) thresholds and the small gift exemption. Furthermore, it allows a client to clearly identify who they want to benefit from the trust without the need to wait for probate in the event of death as the gift is made once the trust is established. The additional flexibility of having the power to manage the investment but choosing when and how much to invest makes the Bare Trust a very attractive solution for clients looking to manage their estate.

A bare trust arises when money is placed in a trust fund in the names of the trustees but is treated as always belonging to the beneficiary. Bare Trusts are particularly suitable for minors (under the age of 18). Importantly clients who pay money into the trust must be alive at the time of making the trust and fulfil their role as settlor. Clients then also choose to appoint a minimum of one additional trustee as an additional source of security to make sure the money is managed responsibly for the beneficiary.

A bare trusts is a legally binding contract and clients should take time to ensure that it is suitable solution for them. It will not for example be suitable in cases where the client would like to retain personal ownership or gain access to the money for personal use later. The beneficiary becomes entitled to access the proceeds of the investment when they are 18 years old, unless otherwise specified at the outset. The purpose of the trust is to hold the investment in the name of the beneficiary. However, once the funds are released to them, trustees have no control over what the money is used for.

A Bare Trust Case Study

A very typical client case study we see is a grandparent looking to establish a bare trust for their grandchildren. Taking a recent case study, John and Maura wanted to gift money to their 5 grandchildren, all under the age of 4, in the most tax efficient way. We advised John and Maura to set up 5 separate bare trust bonds:

– They may contribute a sum of €32,500 to each bare trust in their capacity as settlors and lock in today’s CAT thresholds. The gift would fall within group B of the CAT thresholds (Grandparent/Child)

– The bare trust bond is taxed on a gross roll up benefit, so exit tax is only applied on exit/every 8 years

– Under this bare trust bond, the beneficiaries may withdraw the money from the bond at age 18 when only exit tax is applied

– Exit tax is currently 41% of the gain realised on an investment policy

– Over a 20-year period and assuming the policy would accumulate to €120,000 per child and given the current inheritance tax rate is 33%, this could equate to a tax saving of nearly €30,000

– Exit tax is deducted and paid by the bare trust bond provider

– John and Maura can top-up the trust every year by €3,000 each by utilising the SGE

When sitting down with loved ones and family to discuss inheritance/estate planning, the value of bare trusts and utilising the current CAT Thresholds in conjunction with the annual SGE should not be overlooked. Furthermore having a robust legal structure such as a bare trust allows the trustees to invest the money on the beneficiary’s behalf, change investment instructions and withdraw and appoint the funds as appropriate. For many families, the goal of strategic financial planning is not simply to manage, multiply and protect their wealth, but to leave a financial legacy for the next generation based on a shared understanding and common set of values. We always recommend talking to an independent financial advisor to discuss your options further, and the possible implications from an inheritance perspective, to choose what best meets your needs.